June 14, 2012

Consumer Groups Argue Music Merger Would Stifle Competition

Two leading consumer groups today filed detailed comments with the Federal Trade Commission objecting to Universal Music Group's proposed $1.9 billion acquisition of the EMI music recording business.

The Consumer Federation of America and Public Knowledge say the combination, which would eliminate one of four major record labels, would result in higher prices and undermine incipient competition.

"In simple terms the post-merger firm would have a strong incentive and increased ability to exercise market power to undermine, delay, and distort new digital distribution business models, in a market that has been a tight oligopoly for over a decade," said Mark Cooper, director of research at the Consumer Federation, in a news release.

In November, Universal - the world's biggest record company and home to artists including Lady Gaga, Rihanna and Justin Bieber - announced its bid for EMI's music business. At the same time, Sony Corp. announced it would buy EMI's music publishing business for $2.2 billion. London-based EMI was seized by Citigroup in February 2011 after its owner, a British private equity firm, was unable to meet loan obligations.

Both deals are pending before the FTC, but Universal, which is represented by D. Bruce Hoffman of Hunton & Williams and Glenn Pomerantz from Munger, Tolles & Olson, has found itself on the hot seat. Next week, the Senate antitrust subcommittee will hold a hearing on the Universal deal, while in Europe, regulators have already cleared Sony's purchase but are preparing to sue to block the Universal-EMI combination, an official said in a speech last week.

In lengthy FTC comments filed today, the public interest groups laid out key objections to the transaction. According to the groups, the merger would move the market for recorded music sales by revenue from "un-concentrated" to "moderately concentrated." This would increase the Hirschman-Herfindahl Index, or HHI, which is used to measure concentration, by more than 500 points — five times the level that typically triggers regulatory concern.

The concentration is more extreme when measuring the market for albums, they say, and would result in an increase of more than 1,000 HHI points. "The issue of market definition will be hotly debated, as always happens in merger review, but we are convinced that album sales, which remain the dominant source of revenue for the labels, is a well-defined market that is extremely important," wrote Cooper of the Consumer Federation and Public Knowledge staff attorney Jodie Griffin.

They also argue that "the post-merger firm would have a powerful position in the digital product space, controlling six of the all-time top ten selling digital artists. The tight oligopoly that has existed for a decade in physical albums has transferred to digital albums and spans both physical and digital products."

The consumer groups were not persuaded by the merging parties' claim that piracy will keep abusive pricing in check, which they said was "erroneously invoked as a justification for a grossly anticompetitive merger."

They continued, "Consumers spent almost $2.5 billion on digital products last year. They would have to be fools to do so if piracy were as easy as the record labels claim. More to the point in terms of this merger review, why would consumers who paid $10.40 per digital album (on average in 2011) suddenly resort to piracy if the price of digital albums went up to $11?"

Universal spokesman Peter Lofrumento in an emailed statement called the concerns “the same song sung to a different melody,” and argued that the consumer groups’ analysis “continues to vastly overstate market concentration. Indie labels are a vibrant and growing force accounting for nearly 30 percent of the market. The music industry is intensely competitive and barriers to entry have evaporated in today’s digital environment. Labels cannot dictate the price in a marketplace where a handful of major retailers account for the majority of music sales. “